Two weeks ago, Federal Trade Commission (FTC) Chairwoman Edith Ramirez, writing on her own behalf, submitted comments in Investigation No. 337-TA-613, Certain 3G Mobile Handsets and Components Thereof (the 613 Investigation) on how the International Trade Commission (ITC) should approach the adjudication of the FRAND defense when conducting the public interest analysis. Last week, two FTC Commissioners added their voices to the ongoing public conversation on the FRAND defense, and on the competing concerns about patent hold-up and patent hold-out that animate the debate. In their Reply Submission on The Public Interest, Commissioners Maureen Ohlhausen and Joshua Wright recommend against a public interest analysis that presumes that patent hold-up is a prevalent problem in the real world, “and instead support Administrative Law Judge (ALJ) Essex’s evidence-based approach to the public interest inquiry.”
In elaborating his evidence-based approach to the determination of whether an exclusion order is in the public interest in cases involving patents alleged to be essential to the practice of a technical standard, Judge Essex explicitly addressed the concern, expressed by a number of commentators, including the FTC and the DOJ, that patent hold-up in the context of standard-essential patents (SEPs) is a serious problem. (Patent hold-up occurs when the owner of a standard-essential patent attempts to extract a higher royalty rate than she would have been able to obtain for the patent absent its inclusion in a standard that has now been widely adopted.) After surveying the parties’ submissions and other data, Judge Essex observed that while patent hold-up is a theoretical possibility, it is not clear that it has ever occurred in the real world. He then held that concern about the theoretical possibility of patent hold-up is not enough to justify deviating from the statutory mandate empowering the ITC to issue exclusion orders to prevent the importation of infringing goods when patent holders have met all the other requirements of proving entitlement to such orders. Rather, he observed, evidence of actual patent hold-up should be required before an ITC complainant is stripped of its statutory remedy for the infringing acts of respondents. Judge Essex also held that, as with the other elements of the FRAND defense—that the patents in suit are “standard essential,” that they are encumbered by a commitment to license on FRAND terms, and that the patent owner violated its FRAND obligation—the burden of proving the complainant engaged in patent hold-up is properly on the party asserting the defense.
In her Written Submission on the Public Interest, Chairwoman Ramirez responded to Judge Essex’s decision by arguing that complainants, not respondents, should bear the burden on the FRAND defense—that is, the burden should not be on respondents to prove that complainants engaged in patent hold-up, as Judge Essex held; rather, it should be on complainants to prove that they did not engage in patent hold-up, or run the risk that the Commission will find that they are not entitled to an exclusion order.
Commissioners Ohlhausen and Wright disagree. “The ITC should not begin its analysis by initially imposing upon the SEP holder the burden of proving that the accused infringer is unwilling or unable to take a license on FRAND terms,” they say in their Reply Submission. “This approach presumes patent holdup is frequent and results in significant negative consequences for competition and innovation. Such a sharp departure from the current state of the law requires substantiation in the form of robust and reliable empirical evidence. However, the data simply do not support such a presumption,” they explain. “There is no empirical evidence to support the theory that patent holdup is a common problem in real world markets.” If it were a common problem, they observe, we would expect to see higher prices, reduced output, and lower rates of innovation over time, but instead we have seen the opposite over the past decade, as average prices for consumer electronics continue to drop, consumer electronics sales continue to rise, innovation is proceeding at a rapid pace, and market concentration in this industry has gone from “highly concentrated in 2007 … to unconcentrated by the end of 2012.”
Moreover, the Commissioners explain that, aside from being without evidentiary support, the approach of imposing on SEP holders the burden of proving that accused infringers are unwilling or unable to take a license on FRAND terms is problematic for several other reasons. First, it is “contrary to sound economic analysis,” which has identified several market-based factors, like reputational and business costs, that mitigate the potential for patent hold-up.
Second, such an approach “would be contrary to the United States Representative’s (USTR’s) directive in the Samsung matter,” which instructed the ITC, when undertaking the public interest inquiry, to “make explicit findings” regarding the presence or absence of patent hold-up or reverse hold-up in each case. Likewise, it would be contrary to the Federal Circuit’s holding in Ericson, Inc. v. D-Link Systems, Inc., 773 F.3d 1201 (Fed. Cir. 2014) that evidence of actual hold-up must be presented—and must be presented by the accused infringers, who bear the burden of showing the patent owner used the threat of injunctive relief to gain undue leverage and extract higher-than-FRAND royalties—before the jury may be instructed regarding the concern over patent hold-up. Thus, the Commissioners observe, “[a]ny proposal advocating that the ITC should presume the existence of holdup and shift the burden of the SEP holder to prove unwillingness would require the ITC to ignore the USTR’s clear instructions and Federal Circuit precedent.”
Third, the approach of presuming hold-up and of placing the burden of disproving its existence on SEP holders “would also threaten to deter [their] participation in standard setting by, among other things, encouraging reverse holdup and holdout, thereby depriving consumers of the substantial procompetitive benefits of standardized technology.” As the Commissioners explain, if injunctive relief is no longer available, and “the worst penalty an SEP infringer has to pay is the FRAND royalty it would have otherwise paid beforehand, then reverse holdup and holdout offer implementers highly profitable deferred tax strategies that are highly detrimental to SEP holders.” Such an outcome will only serve to deter participation in standard setting, they caution. Indeed, if, despite the absence of a showing that there has been actual patent hold-up, SEP holders are no longer able to obtain exclusion orders when they would otherwise be permitted to do so under the terms of the applicable agreement of the standard setting organization (SSO) at issue, they will have little incentive to contribute their patented technology to the development of standards in the first place. This will ultimately harm consumers—the primary beneficiaries of standardized technology.
Commissioners Ohlhausen and Wright conclude by urging the ITC, which is well-suited to conducting fact-specific inquiries, to “affirm ALJ Essex’s evidence-based approach” to the public interest inquiry and to “require proof that a SEP holder used injunctive relief to gain undue leverage and demand supra-FRAND royalties prior to precluding an exclusion order on public interest grounds based on holdup concerns.” The ITC is expected to issue its decision in the 613 Investigation in the coming weeks.